Educational Articles

Using a Value Line Report: Disney’s Next Quarter – May 11, 2012

Reuben Gregg Brewer
| May 11, 2012

Walt Disney (DIS – Free Value Line Research Report on Walt Disney) reported earnings after we went to press with our most recent full report. Although we noted our expectations for the quarterly results, we clearly couldn’t speak definitively about them at that time. Now that the company has reported, analyst Orly Seidman has posted a Supplementary report for Walt Disney, also available for free, to update Investment Survey subscribers on the now available results.

The Supplements are an important aspect of The Value Line Investment Survey. These between scheduled coverage reports are posted online as events dictate, and update our previous guidance on a company. They are also included in the Ratings & Reports section of the next published issue, for those who prefer to receive ink and paper.

The news with Walt Disney is actually kind of interesting. The company has been doing reasonably well, but the recent quarter saw a hit from John Carter. Who’s John Carter you ask? Exactly! No this isn’t some kind of Ayn Rand “Who is John Galt” inside joke, it’s the name of the movie behind Disney’s movie division’s $84 million loss in the quarter. Seidman goes into more detail in the regular quarterly Analyst Commentary, but suffice it to say that John Carter was a very expensive movie that didn’t do very well.

Now a company with the financial strength of Disney isn’t going to take too big a hit from such a miss. Indeed, as the Current Position box shows, it had over $3.5 billion in cash on its balance sheet at the end of 2011. Moreover, with its $14 billion of debt, which makes up just 23% of the capital structure (both pieces of information are found in the Capital Structure box), even if the company had to use debt to cover up that shortfall (which it categorically does not), $200 million would be a rounding error.

Clearly, Disney earns Value Line’s highest possible score (A++; found in the Ratings box) for Financial Strength for a reason. So, putting the past behind, what is most interesting about the quarter is that it didn’t include The Avengers movie. This movie has proven to be a smashing success and will likely add to the bottom line materially when the next quarterly results are released. And that doesn’t even take into consideration the income stream that will come on in subsequent periods from such things as DVD sales and movie-related product sales.

Even more interesting than a few quarters of earnings, however, is the long-term strategic impact of the movie. Disney is known for making small children and girls very happy. After all, what child doesn’t love the Disney brand? Moreover, how many little girls do you know who don’t go through the “princess” stage. The company has gone to great lengths to cultivate this image and to spread it throughout the world. The one problem Disney has had through the years, however, is boys. After boys outgrow their love for Mickey Mouse and his loveable friends, Disney has little to compete with GI Joe’s, Pokemon, and the Hot Wheel’s of the world.

There was a half-hearted attempt to gain this exposure with the purchase of Power Rangers. However, it never appeared that Disney knew exactly what to do with that franchise and it languished until it was sold back to its founder. That was around the same time that Disney bought Marvel. There were some legacy contracts that had to be worked off on the movie front, but now Marvell is all Disney. And it is clear that Disney knows how to make successful movies out of Marvel’s super hero properties.

In addition, the company is slowly brining the heros into the Disney brand. For example, the comic books and assorted branded merchandise are starting to make their way into Disney stores. Clearly there is a risk of image clash, but that may be more theoretical than real, as the typical Disney customer wouldn’t even pay attention to Marvel products while that customer’s older brother (and sister) will welcome the edgier offerings.

Although Disney’s big win of the rights to build an Avatar Theme Park was nice, particularly after losing out on the rights to Harry Potter, it might pale in comparison to the benefits of eventually adding a Marvel super hero themed park. In fact, Avatar is a franchise that may have limited longevity while super heros have proven capable of reinventing themselves with each new generation.

Summing it up, Disney’s quarterly results were pretty good, even with the John Carter flop. They are likely to get materially better over the next few quarters, and the long-term picture seems pretty bright. With a Timeliness Rank of 2 (Above Average) and a Safety Rank of 1 (Highest), both found in the Ranks box, investors would do well to take a closer look at the recently “Super” Mouse House.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.